The naysayers are out en force once again on Netflix (NFLX) as the company prepares to release its second-quarter earnings report. Analysts are trotting out the same issues that investors have heard for quite some time: questioning the price the company pays for content, highlighting negative cash flows, and pointing toward increasing competition with Amazon (AMZN), HBO and Showtime.
But, as we’ve learned in the past, the only thing that seems to hurt Netflix is … Netflix.
Click to Enlarge So far this year, NFLX has rallied more than 180%, making it the best performer in the S&P 500 Index. The stock closed Friday at $264.58 — less than 15% shy of its all-time peak at $299 set roughly two years ago.
Back then, the shot that sunk Netflix’s ship was the company’s ill-conceived move to spin off its DVD rental business and raise prices at the same time. The move undermined investor confidence and sent the stock plunging.
This time around, Netflix is firing on all cylinders, not only growing its subscriber base, but also churning out an Emmy-nominated original series. Marking a first for Internet streaming services, Netflix’s House of Cards has received nine Emmy Award nominations, including Best Drama. All told, Netflix received 14 Emmy nominations.
And yet, the company’s sentiment backdrop is awash with negativity.
In the brokerage community, NFLX has attracted only 11 “buy” ratings, compared to 17 “holds” and four “sell” ratings. Additionally, the consensus 12-month price target of $230 represents a discount of about 15% to Netflix’s Friday close.
Elsewhere, short sellers are also betting heavily against NFLX. Despite a nearly 16% decline in shorted shares during the most recent reporting period, some 7.2 million NFLX shares remain sold short. Representing a hefty 14.5% of the stock’s total float, or shares available for public trading, these short positions could provide fuel for a short-squeeze rally in the event of a positive second-quarter earnings report.
Options traders also are taking a negative stance toward NFLX. Specifically, the stock’s August/September put/call open interest ratio arrives at 0.92 — placing puts and calls in near parity ahead of the company’s quarterly report. Peak August call open interest totals 2,426 contracts at the 300 strike, while peak front-month put open interest numbers 2,299 contracts at the 230 strike. Other notable accumulations include the August 210 put (2,207 contracts) and the August 260 call (2,257 contracts).
Overall, options traders are pricing in a post-earnings move of about 14%, placing the upper bound near $302 and the lower bound near $227. During the past four quarters, NFLX has averaged a post-earnings move of 25%.
For those looking for a NFLX options trade ahead of earnings this afternoon, the combination of heavy bearish sentiment and the stock’s strong price action creates a potential bullish opportunity. One way to take advantage of a post-earnings NFLX rally would be an August 260/300 bull call spread.
After the close of trading on Friday, this spread was offered at $15.20, or $1,520 per pair of contracts, placing breakeven at $275.20. A maximum profit of $24.80, or $2,480 per pair of contracts, is possible if NFLX closes at or above $300 when August options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.